Retirement Security for Women

A key component of retirement security and comfort for women is securing a dependable income stream in retirement. Women are living longer and therefore are exposed to greater financial risk. Women face a perfect storm of conditions that can jeopardize their retirement security even more than men.

On May 3rd, ING U.S. released findings from a study commissioned by the ING Retirement Research Institute that sheds light on the distinct realities women encounter when saving and preparing for retirement.
According to the study, among those who have savings in or outside of an employer-sponsored retirement plan, men have substantially more saved than women, on average they have $41,000 more in total savings than women.

Let’s look at some statistics.
• The majority (60 percent) of mothers do not feel prepared for retirement and almost half (46 percent) don’t know how to achieve their retirement goals.
• Less than three-in-ten (28 percent) have calculated how much they’ll need to retire, compared to half (50 percent) of men.

There are one million baby boomer widows in the United States, a number that will rise significantly in the future because there are almost 25 million married boomer women, and 70 percent of them are expected to survive their husbands.

Women as a group, live longer than men by a margin of as much as 10 years. The Gender discrepancy is most pronounced in the very old: Among centenarians worldwide, women outnumber men nine to one. Most married women can expect a five-to-ten-year period of widowhood at the end of their lives.

The reason? Most men marry women who are two to four years younger than them, and women live, on average, three to five years longer than men. It’s inevitable that there’s going to be more women than men who survive into their later years. As money is a finite resource, we have to get the most out of it.

One needs to be able to carry-on after the death of the other, without interferences caused by lack of information and understanding of bank accounts, investments, pensions, Social Security, property. With an average life expectancy of more than eighty-five, that translates into a lot of years where a widowed woman must deal with the issues of her own well-being without her primary life partner’s advice or guidance or income.

Under the joint and survivor annuity, a lifetime benefit is provided for the widow. This means the payments continue to the annuitants as long as one of the annuitants is alive. This choice does not jeopardize their spouses’ economic security if they become widowed.

When you withdraw from retirement savings on your own, you have to manage to the worst case, which is you living well beyond your life expectancy. You need to manage to the law of one number — you! The longer you live, the greater your chances of running out of money. If you start withdrawing retirement income too early, withdraw too high of percentage, or don’t invest with principal protection in mind, you may spend down your principal too soon.

How Do Annuities Fit in Your Financial Planning

The longer you live, the greater your chances of running out of money. If you start withdrawing retirement income too early, withdraw too high of percentage, or don’t invest with principal protection in mind, you may spend down your principal too soon.

Historically, stock and bond markets have moved out of tandem, so that whenever one market dropped the other was typically performing well. This allowed a diversified investment portfolio to always be able to tap growth potential somewhere to some degree, while also offering downside protection through more conservative holdings.

Recent market volatility has provided a shorter investment timeframe and the fact that these investments now move in tandem, rendering a diversified portfolio less effective – you may wish to consider positioning your retirement portfolio for secure income sources.

Let’s compare annuities with other popular products – mutual funds and bank certificates of deposit – to see where they fit.

One common way to compare investment alternatives is to look at a spectrum of risk and reward, that is, a spectrum of risk and expected return. Financial vehicles that provide substantial protections against risk are able to attract money at relatively low returns, whereas risky financial vehicles must provide much higher potential and expected returns in order to attract money from investors.

Now, let’s look at the financial vehicles we are considering. We’ll travel from safest to riskiest on the risk/return spectrum.

Bank certificates of deposit: These are clearly very safe, as the principal is guaranteed first by the issuing bank and second, up to a limit, by the FDIC. The interest rate you will earn is also guaranteed for the duration you select. If you choose to take your money out early, the penalty is typically very modest, equal to only a few months of interest. As a result of their safety and predictability, interest rates on bank certificates of deposit are usually fairly low.

Fixed annuities: These are also very safe, as the principal is guaranteed first by the issuing insurance company and second, up to a limit, by state insurance guaranty funds. Fixed annuities are available in a range of surrender charge durations, many with interest rates that are fully guaranteed for the duration selected. Surrender charges are higher and perhaps longer than on bank certificates of deposit, which allows issuing insurance carriers to typically provide higher interest rates than bank certificates of deposit.

Fixed indexed annuities: These are a type of fixed annuity, and thus they are very safe. The principal is guaranteed first by the issuing insurance company and second, up to a limit, by a state insurance guaranty fund. Where they differ from other fixed annuities is that the interest rate is not guaranteed at as high a level as most fixed annuities, but the interest rate fluctuates from year to year depending upon movement of the referenced market index and the formula applied to that movement. Fixed indexed annuities can provide even better rates of interest under certain conditions.

Mutual funds: These are securities, and that gives you a clue that we are now entering much riskier territory. The principal is not guaranteed by anyone. The return in any one given year can be sharply positive or negative. For example, a common proxy for stock fund returns is the S&P 500 index, which rose 26% in 2003 and dropped 38% in 2008. Thus, for mutual funds to attract money, they must offer the prospect of a higher likely return than indexed annuities. Over the last century, they have done so, although over the last decade, they have fallen woefully short.

Thus, the fundamental spectrum of risk and expected return is filled in the appropriate places by fixed and indexed annuities. They offer a higher likely return than bank CD’s, but a lower likely return than mutual funds, which are much more risky.

As long as you properly understand where annuities fit and make decisions on that basis, you will find that annuities are valuable financial products, and retirement savers are better off that they exist.

This article is intended as general information only and should not be construed to be investment advice. For investment advice, please seek a qualified advisor.

Seventy – The New Retirement Age?

Individuals can begin collecting Social Security benefits as early as age 62.  At this age, the monthly benefit amount is reduced by about 30%.  However, each year you delay receiving Social Security benefits, the percentage of reduction decreases until age 67.  This is currently considered the normal retirement age for people born after 1954.

In other words, the longer one waits to start collecting Social Security benefits the larger the monthly check.  If you wait until age 70, benefits earn extra credit – nearly a third more.

Example:

An individual waits until age 67 to begin receiving Social Security Benefits of $1,000 a month.  Had this same individual started collecting benefits at age 62, the monthly benefit would be reduced to $750 a month.  If they wait until age 70, they might received $1,320 each month.

Based on this,  those individuals who are still working, in good health, expect to exceed the average life expectancy, and are the higher-earning spouse are advised to wait until age 67 or more to collect benefits. 

There have been recent proposals to raise the Social Security retirement age to 70 by the year 2040, however no decisions have yet been made.

The Obama Administration Proposes New Rules

The new rules are aimed at encouraging retirement savers to tap annuities and other products that allow them to turn their savings into a guaranteed monthly income for life.

Of two rules proposed by the U.S. Treasury and Labor Departments, one would encourage employers and IRA providers to offer longevity insurance, also known as deferred income annuities, in 401(k)s and other workplace plans and individual retirement accounts.

The other proposed rule is aimed at helping employers encourage workers in traditional defined-benefit pension plans to annuitize — that is, hand over money to an insurer in exchange for a guaranteed monthly payout for life — at least a part of their retirement savings.

Faced with investing their savings for the long haul in unpredictable and often turbulent financial markets, without knowing how long they need their money to last, retirees risk running short — or scrimping unnecessarily.

While annuities have plenty of pros and cons — and those vary widely based on the type of product — they do act as longevity insurance, providing a steady stream of money for life.

According to the Treasury Department, currently some employers and IRA providers are hesitant to offer such annuities in part because retirees must count the dollars they use to purchase this type of annuity when they go to calculate their required minimum distributions, or RMDs, from their tax-deferred retirement plans — even though those dollars are essentially locked away in the annuity and they won’t reap the benefits of the annuity until they are, say, 85 years old. (Required minimum distributions must start at age 70-1/2.)

The proposed rule would allow those dollars to be excluded from RMD calculations, as long as the annuity met a variety of requirements.